September 2010

The government today eased the foreign direct investment norms for sectors like wholesale cash-and-carry trading, non-banking finance companies (NBFCs) and certain segments of animal husbandry, besides bringing about procedural simplifications. There was, however, bad news for foreign tobacco product manufacturers and the real estate sector. The Consolidated Foreign Direct Investment (FDI) Policy, which would be effective from October 1, has been formally included in the list of activities in which FDI is prohibited. The move follows controversy around Japan Tobacco’s entry into the Indian market. In case of the real estate sector, the government has ruled out any relaxation in the three-year lock-in criteria for now. Instead, for construction development projects, the Department of Industrial Policy and Promotion (Dipp) has clarified that the lock-in period of three years will be applied from the date of receipt of each tranche of FDI or from the date of completion of minimum capitalisation, whichever is later. At present, 100 per cent FDI is permitted under the automatic route in townships, housing projects, built-up infrastructure and construction development projects. It is, however, subject to a minimum capitalisation requirement of $10 million (around Rs 45 crore) for wholly-owned subsidiaries and $5 million (around Rs 22.5 crore) for joint ventures with Indian partners. While the original money invested cannot be repatriated before a period of three years from the completion of minimum capitalisation, investors can exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). “This is going to be extremely negative for the real estate sector and will affect investment into the sector. The government has also failed to clarify on issues in many other significant areas. However, this exercise of reviewing the (FDI) policy every six months should continue, as that will make the policy more flexible in due course,” said PricewaterhouseCoopers Executive Director Akash Gupt. In case of non-banking finance companies, however, the government decided to ease the norms for downstream investment. It has said NBFCs with 100 per cent foreign investment and a minimum capitalisation of $50 million (around Rs 225 crore), can set up subsidiaries for specific NBFC activities, without bringing additional capital towards minimum capitalisation. For foreign players with interest in the wholesale cash-and-carry segment, there was some good news as the government decided to remove the restriction on internal use. It, however, retained the ceiling, mandating that such companies could at best sell up to 25 per cent of their turnover to group companies. The move would have implications on several retailers like Bharti-Walmart, Carrefour and Metro Cash and Carry, which had been lobbying for removal of the two restrictions. They can, however, draw comfort from the fact that Bharti Retail, for instance, can sell goods sourced from Bharti-Walmart at its stores. On procedural aspects, the government has said downstream investments through internal accruals are permissible. “This clarity was necessary as the FDI policy says that for the purpose of downstream investment, the operating-cum-investing/investing companies would have to bring in requisite funds from abroad and not leverage funds from the domestic market for such investments. While this would not preclude companies from making downstream investments through ‘internal accruals’, it had been noticed that, in certain cases, some companies had started accessing the government approval route for downstream investments through internal accruals,” an official statement said.